Malloy challenges lawmakers to reform state’s finances

The long-promised move to more open and transparent budget principles turned out to be part of a much larger fiscal reform agenda unveiled Wednesday by Gov. Dannel P. Malloy.

The new governor also challenged state legislators in his new budget Wednesday to end the long-standing system of approving state employee contracts by default, to trim their own finances and to expand the Executive Branch’s power to impose emergency budget cuts.

Malloy, who campaigned on a pledge to solve the largest deficit in state history with an “honest and balanced” proposal, kept his promise not to propose borrowing, pension fund raids or early retirement incentives — fiscal gimmicks that helped create a $3 billion-plus hole in 2011-12.

The administration also proposed a 50 percent increase in the state’s allowable emergency reserve, and recommended new initiatives to force better saving habits.

“When I stood before you in January, I talked about crisis and opportunity, of standing at a crossroads of historic proportions, of having to choose our path forward,” Malloy told legislators Wednesday. “I called for innovative thinking and for us to muster up the intellectual, emotional and political courage to take a different path, a better path, on behalf of the people of Connecticut.”

“It’s a new days in terms of moving this budget process away from… years of bad fiscal management,” said Roy Occhiogrosso, Malloy’s senior adviser. “I think what the governor said during the campaign holds true.”

Almost immediately after launching his campaign for governor more than a year ago, Malloy vowed not to sign his first budget into law unless it began to move Connecticut’s finances toward “generally accepted accounting principles.”

Unlike the modified cash basis currently used, under GAAP expenses must be promptly assigned to the year in which they were incurred. Similarly, revenues are counted in most situations in the year in which they were received. In the context of the state budget, that means swearing off an array of fiscal gimmicks that push expenses–on paper–into the future, while drawing revenues back in similar fashion, sometimes turning deficits into surpluses.

According to the state comptroller’s office, the projected deficit for the coming fiscal year, which ranges from $3.2 billion to nearly $3.7 billion, would be about $1.35 billion greater under GAAP rules.

The first step in the conversion involves adding about $120 million to Connecticut’s budget over the next two fiscal years just to keep that GAAP margin from growing due to inflation.

“Moving the state to an honest accounting system costs money,” said Malloy’s budget director, Benjamin Barnes.

The administration is expected to outline a plan in future budgets to gradually close that gap over 10 years or longer.

State government did have nearly $1.4 billion in its emergency reserve, but former Gov. M. Jodi Rell and the previous legislature expended all of those funds over the last two years to mitigate spending cuts and tax hikes.

Current law allows state government to build a reserve equal to 10 percent of annual operating expenses, but Malloy proposed that this limit jump to 15 percent.

“Setting aside surpluses for a rainy day is a prudent measure that will help the state deal with economic downturns in the future,” Malloy’s budget summary states.

To help government rebuild its reserve, the governor proposed several reforms to rebuild the reserve or reduce debt and spending, including:

Dedicating half of any surplus identified in the comptroller’s monthly forecast for the reserve.

Depositing all lawsuit settlements or recoveries obtained by the attorney general’s office into the state’s under-funded pension or retirement health care benefit accounts.

Expanding the governor’s ability to unilaterally reduce spending in tough fiscal times from a maximum of 5 percent of any account up to 10 percent.

Allowing the governor to recommend annual spending levels for any component of government. Currently, the Executive Branch is banned from including any spending line item recommendations for the Legislature, the Judiciary or for small state watchdog agencies–such as the Office of State Ethics or the Freedom of Information Commission–in its annual budget proposal. Instead it must include the recommendations developed by those branches or offices without adjustment.

Malloy’s administration wrote in its budget summary that it believes the Legislative Branch’s $86 million budget could be reduced by just over $10 million next fiscal year “through cost-cutting initiatives or by reducing, streamlining or eliminating staff or services.”

Malloy’s first budget also challenges the governor’s fellow Democrats in the legislative majority to abandon a practice they have defended in the past: allowing lawmakers to approve arbitrated contract awards–and thereby raises as well–for state employees, without having to actually vote on them.

Current law only requires the legislature to vote if it wants to reject a contract award or raise, something that hasn’t happened since 1996. Otherwise, contracts and raises are deemed approved if no action is taken within 30 days.

The legislature’s Republican minority in the House has proposed requiring contract votes in each of the past two terms, but Democrats blocked the effort each time.